May 09, 2013

Benefitting from Housing’s Burst Bubble

I recently purchased a home in Los Angeles, something I
wasn’t sure I’d ever be able to afford. When prices started skyrocketing in the
mid-2000s, like many other people I chose not to buy and saved my money
instead. I was glad I did, despite some acquaintances insisting that prices
would only get higher. In 2005, the median price of a single
family home in Los Angeles was about $529,000; by 2008 the median price
fell to $340,000. (The median is
the point at which half of all homes cost less, and half cost more).

After watching prices and interest rates fall, I began
looking in earnest. I got very excited to see I could actually afford to buy in
a neighborhood where I would like to live. I began by looking online, and found
many places that fit my criteria: in my price range, a reasonable commute to
work, nearby places to walk or hike, and safe enough for me to take a walk
alone. In fact, there were so many places that I got picky, at first only
wanting to see places that had been decorated to my taste. If I didn’t like the
flooring or the kitchen countertops, I passed. Most of the listings were short sales,
meaning the homeowner owed more on their mortgage than they could expect to
sell for. Banks will often agree to accept less money in order to avoid the
more expensive and time consuming foreclosure process.

A few months into my search I saw the market change. No
longer were properties lingering on the market for months as they had before,
going for thousands less than their initial asking price. People started
snapping up condos and houses, often within days of their being placed on the
market. Many had multiple offers: I was outbid on two offers I made by buyers
who were paying with all cash.

Finally I got lucky. A townhouse in my ideal neighborhood
came on the market. Once again, there were multiple offers, but apparently none
with all cash. Since mine was the highest offer, the seller accepted, and now
at long last I am a homeowner.

The Times reports
detail stories of middle-class would-be homeowners who found themselves outbid
on every home they tried to buy, unable to compete financially with big
companies with deep pockets. An economist quoted in the Times article stated, “They create
the problem — and now they are taking advantage of the problem,” referring to
the idea that the financial sector created the housing bubble in the first
place, by providing risky loans to homeowners, then selling these loans to
investors. When these investments collapsed, so did many financial firms,
leading to the government’s bailout
of the financial industry a few years ago.

The investment firms are focusing primarily on the Inland
Empire section of southern California, one of the hardest hit by the housing
crisis, and one of the more affordable areas of the region. Targeting this area
leaves lower-middle class and working class buyers largely out of the housing
market. While pricier neighborhoods have also seen real estate prices decline,
the drops are more modest and there are fewer properties available, so people
in higher income brackets are less affected by this practice.

Not only does this leave many people who have saved their
money, have good credit, and can afford to buy a home on the sidelines, but the
cost
of renting has risen too. Those who have trouble finding a home to purchase
have to pay more in rent, and they are subject to rental increases and cannot
benefit from mortgage
tax deductions or build equity in their home—the largest source of wealth
for most Americans.

Would-be homeowners have to compete with investment
companies, and the competition itself has led to an increase
in home prices. When there are more buyers than sellers prices can rise
quickly, especially when inventory is low. Many homeowners, seeing that prices
are rising, may choose to wait to sell their homes in hopes of reaping bigger sales prices later.

The practice of buying multiple properties to use as rentals
affects more than just potential buyers. Firms have bought about 20,000 homes
in nine areas, according
to the report, including 74 in one neighborhood. Communities filled with
renters are generally less stable, as absentee landlords might have less
incentive to keep up the properties and make minor improvements that maintain
neighborhood property values. So a homeowner on a street filled with rentals
might see their property value decline through no fault of their own.

The decision to become a homeowner is a big one, and the
process of looking can be exhausting. Putting in an offer only to be outbid can
be a hug emotional letdown.But more
importantly, it can perpetuate economic inequality by systematically keeping
responsible people with modest incomes out of homeownership.